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Companies

prepare four nancial statements from the


summarized accounting data:
1. An income statement presents the revenues and expenses and
resulting net income or net loss for a specic period of time.
2. An owners equity statement summarizes the changes in
owners equity for a specic period of time.
3. A balance sheet reports the assets, liabilities, and owners
equity at a specic date.
4. A statement of cash ows summarizes information about the
cash inows (receipts) and outows (payments) for a specic
period of time.
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1. Each transaction is analyzed in terms of its effect on:


(a) the three components of the basic accounting equation.
(b) specific items within each component.
2. The two sides of the equation must always be equal.

Revenues are reported rst on the income statement. They include consulting
revenues of $5,800 from transactions e and g and rental revenue of $300 from
transaction 8. Expenses are reported after revenues.
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Reports revenues and expenses for a specic period of


time.
Net income revenues exceed expenses.
Net loss expenses exceed revenues.
Net income is needed to determine the ending balance
in stockholders equity.

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The statement of owners equity reports information about how equity changes
over the reporting period. This statement shows beginning capital, events that
increase it (owner investments and net income), and events that decrease it
(withdrawals and net loss).
Arrow lines show how the statements are linked. ! Net income is used to compute equity.

The ending balance in retained earnings


is needed in preparing the balance sheet

Arrow lines " Owner capital is used to prepare the balance sheet.
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This presentation of the balance sheet is


called the account form: assets on the left and
liabilities and equity on the right.
Another presentation is the report form:
assets on top, followed by liabilities and then
equity at the bottom. Either presentation is
acceptable.

Arrow lines # Cash from the balance sheet is used to reconcile the statement of cash ows.
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Answers:
1. Where did cash come from during the period?
2.How was cash used during the period?
3.What was the change in the cash balance during the
period?


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The income statement, the statement of owners


equity, and the statement of cash ows are prepared
for a period of time.
The balance sheet is prepared as of a point in time.
A single ruled line denotes an addition or
subtraction.
Final totals are double underlined.
Negative amounts are often in parentheses.

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We organize nancial statement analysis into four areas:


(1) liquidity and eciency
(2) solvency
(3) protability
(4) market prospects
Return on assets is useful in evaluating management, analyzing and forecasting
prots, and planning activities. Return on assets (ROA), also called return on
investment (ROI )

Net income is from the annual income statement, and average total assets is
computed by adding the beginning and ending amounts for that same period
and dividing by 2.

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To illustrate:

Best Buy reports net income of $1,317 million for scal year 2010. At
the beginning of scal 2010, its total assets are $15,826 million and
at the end of scal 2010, they total $18,302 million. Best Buys return
on assets for scal 2010 is:

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Presented below is selected information related to Wane


Company at December 31, 2012. Wane reports nancial
information monthly.

(a) Determine the total assets of Wane Company at December 31, 2012.
(b) Determine the net income that Wane Company reported for December 2012.
(c) Determine the owners equity of Wane Company at December 31, 2012.

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a)
b)

c)

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An account is an individual accounting record of increases and decreases in a


specic asset, liability, or owners equity item

In its simplest form, an account consists of three parts:
(1) a title, (2) a left or debit side, and (3) a right or credit side. Because the
format of an account resembles the letter T, we refer to it as a T account.
The term debit indicates the left side of an account, and credit indicates the
right side. They are commonly abbreviated as Dr. for debit and Cr. for credit.

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When comparing the totals of the two sides, an account shows a debit balance
if the total of the debit amounts exceeds the credits.
An account shows a credit balance if the credit amounts exceed the debits.
Note the position of the debit side and credit side in Illustration.
Notice that in the account form we record the increases in cash as debits, and
the decreases in cash as credits.
The dierence between total debits and total credits for an account, including
any beginning balance, is the account balance.
When the sum of debits equals the sum of credits, the account has a zero
balance.
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Double-entry accounting requires that for each transaction:


At least two accounts are involved, with at least one debit and one
credit.
The total amount debited must equal the total amount credited.
The accounting equation must not be violated.
This means the sum of the debits for all entries must equal the sum of
the credits for all entries, and the sum of debit account balances in the
ledger must equal the sum of credit account balances.

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Increases (credits) to owners capital and revenues increase equity; increases


(debits) to withdrawals and expenses decrease equity.
The normal balance of each account (asset, liability, capital, withdrawals,
revenue, or expense) refers to the left or right (debit or credit) side where
increases are recorded.

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Debit refers to left, and credit refers to right. Debits increase


assets, expenses, and withdrawals while credits decrease
them. Credits increase liabilities, owner capital, and revenues;
debits decrease them.
Double-entry accounting means each transaction aects at
least two accounts and has at least one debit and one credit.
The system for recording debits and credits follows from the
accounting equation.
The left side of an account is the normal balance for assets,
withdrawals, and expenses, and the right side is the normal
balance for liabilities, capital, and revenues.
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1.

Form a group, maximum of 5 members per group. Create a group name for you team.

2.

Research on 2 companies in the same industry (e.g. Automotive Toyota and Honda; IT HP and
IBM; Food Nestle and Kraft; Electronics Samsung and Sony).

3.

Provide the companys background and the nancial statement of each company.

4.

Explain and show how the nancial statement was presented (per company).
Balance Sheet
Income Statement
Statement of Owners Equity
Statement of Cash Flow

5.

Explain how the nancial statement interrelate.

6.

In terms of decision making activities, provide the importance of the nancial statement to the
company and its competition.

7.

Are there any dierence on the way the nancial statements were presented by the two
companies?

8.

Conclusion

9.

Prepare a 5 minutes short presentation on Monday with the written report on a short bond paper.


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